Business context and reporting period
This is CryoLife, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The filing describes a medical-device and human-tissue preservation business focused on cardiac and vascular surgery. The request identifies Artivion, Inc.; the filing itself identifies the registrant as CryoLife, Inc., so confirm the entity and filing match the intended investment review.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $67.9 million | $64.6 million | $206.5 million | $195.0 million |
| Gross margin | $45.2 million (67%) | $42.7 million (66%) | $136.5 million (66%) | $127.8 million (66%) |
| Operating income | $4.7 million | $4.6 million | $13.4 million | $6.5 million |
| Net income (loss) | $(0.1) million | $1.6 million | $2.4 million | $(2.1) million |
| Diluted earnings (loss) per share | $0.00 | $0.04 | $0.06 | $(0.06) |
Revenue increased 5% in Q3 and 6% year to date; excluding foreign-exchange effects, increases were 6% and 8%, respectively. Q3 growth reflected On-X, preservation services, and JOTEC. For the first nine months, growth also included BioGlue. Notable Q3 product and service trends included On-X +12%, PhotoFix +48%, cardiac tissue preservation +19%, and vascular tissue preservation −9%.
Operating cash flow was $14.8 million for the first nine months, compared with cash used of $0.6 million in 2018. Investing activities used $20.8 million, including $15.0 million paid under Endospan agreements; capital expenditures were $5.2 million. Cash, cash equivalents, and restricted securities totaled $37.2 million at September 30, versus $42.2 million at year-end 2018. Cash and cash equivalents alone were $36.7 million.
At September 30, working capital was $139.2 million and the current ratio was 4:1. Long-term debt, net of unamortized issuance costs, was $215.9 million; the revolver was undrawn with $30.0 million available. The term loan’s reported aggregate interest rate was 5.35%. The filing reports $223.8 million of total loan balances before issuance costs. Operating lease liabilities were $23.3 million; finance lease liabilities were $5.8 million.
Material changes versus prior comparable periods
- Q3 net income shifted to a small loss despite higher revenue and operating income. Management attributed the pre-tax deterioration primarily to foreign-currency gains and losses: other expense was $2.4 million, versus other income of $1.5 million a year earlier.
- Nine-month net income improved from a loss to profit. Management cited lower JOTEC integration and business-development costs and lower inventory step-up expense than in 2018.
- Cash from operations improved substantially year over year, while cash used in investing rose mainly because of the Endospan transaction.
- Foreign currency translation reduced comprehensive income by $8.8 million year to date, compared with a $5.1 million reduction in the prior-year period.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities; the filing says adoption did not significantly affect loan covenants.
Outlook, commentary, risks, and unusual items
- No quantified revenue or earnings guidance is provided. Management said cash from operations and existing cash should cover current operational liquidity needs for at least 12 months, while noting that clinical trials, debt service, capital needs, and business development could materially affect future cash flows. Additional financing might be needed for significant future business development.
- Endospan agreements: CryoLife paid $9.0 million for European distribution rights, $1.0 million for an option to acquire Endospan, and funded the first $5.0 million tranche of a secured loan. Up to two further $5.0 million tranches are tied to milestones. The acquisition option price is $350–$450 million, subject to contractual timing and conditions; the option expires 90 days after notice of FDA approval. Endospan was not consolidated; the filing states the $15.0 million paid was the company’s maximum exposure to loss at September 30.
- CardioGenesis handpiece supply was expected to be unavailable for at least most of Q4 2019 pending FDA resolution of supplier manufacturing-location inspection observations. Management anticipated supply resuming by Q1 2020 and said the observations were not believed to relate to quality or safety.
- PerClot’s U.S. pivotal-trial enrollment was completed in January 2019. The filing gives differing submission timing descriptions: the notes and risk discussion say early 2020, while MD&A says the first half of 2020. U.S. approval is not assured; failure could impair related assets.
- Key risks include regulatory approvals and compliance, tissue availability and processing yields, competition and pricing, foreign-exchange exposure, supplier concentration, and substantial variable-rate debt. The company also disclosed a possible range for its estimated unreported product and tissue-processing liability of up to $3.8 million, compared with a recorded estimate of $1.9 million. Management did not believe pending legal matters were likely to have a material adverse effect, but noted outcomes remain uncertain.
- Tax benefits materially influenced results: year-to-date 2019 tax benefit included about $2.0 million from stock compensation deductions and about $0.9 million from the expiration of federal tax statutes of limitation. The unusually high reported effective tax rate reflects low pre-tax income and these items.
Important facts for investors to verify
- Confirm whether this CryoLife 2019 filing is the intended filing for the Artivion request.
- Track actual Q4 2019 and 2020 CardioGenesis handpiece availability and the supplier’s FDA-related resolution.
- Verify PerClot’s FDA submission timing, review progress, and any resulting impairment or commercial impact.
- Assess the Endospan milestones, additional loan funding, recoverability, and potential $350–$450 million acquisition commitment.
- Monitor cash generation, foreign-exchange effects, debt service and covenants, and the company’s stated liquidity assumptions.
- Review regulatory and legal developments, including EEA certification transfers, On-X AAP status, tissue-related claims, and the disclosed range of unreported liabilities.